Operator backs down on blocking Pa. funds to Aker shipyard

A stare-down over a $42 million bailout for Aker Philadelphia Shipyard ended Tuesday when one of the world's largest tanker-ship operators dropped its objections to releasing state funds to keep the shipyard in business.

The ship owner, Overseas Shipholding Group, also happens to be Aker's biggest customer.

New York-based OSG said Tuesday that it would no longer try to stop use of Pennsylvania taxpayer money to help build two more tankers - for which the yard does not have a buyer. OSG said the funding was illegal under state law.

"Our client OSG has decided to no longer pursue their objections to the Aker Shipyard financing," said Harrisburg attorney Raymond Pepe, who directed questions to the Pennsylvania Treasury, "because they are planning on approving the project."

The weeks-long drama began when OSG met privately with Gov. Corbett's staff to try to nix the deal and, when that was unsuccessful, went to the state Treasury.

OSG sent a letter March 21 to Treasurer Robert McCord, urging him to reject the disbursement as a violation of state law, the Pennsylvania Constitution, and the "intent" of the Legislature. The payment also would "wrongfully divert" funds needed to improve the Philadelphia port, the company said.

Corbett had approved the payment last month in a bid to keep the shipyard going. In the bad economy, and because Aker had no new ship orders, employment there fell to about 400 in mid-February from more than 1,000 in July.

In its letter to McCord, OSG said that there was a glut of tankers and that building two more would hurt the overall U.S. shipping industry and "materially harm" OSG - which already has two vessels out of service due to the slow economy.

More ships on the water, it said, could force OSG and its competitors to lower the rates they charge.

McCord, whose job is to scrutinize such payments, last week asked Corbett's general counsel, Stephen Aichele, to respond to legal issues raised by OSG.

After reviewing that response, McCord decided "the payment is going to be put through," said John Lisko, McCord's chief of staff. "The office of general counsel responded to the concerns we raised. It's their belief that it meets all the legal standards. We have reviewed everything and will be paying it."

Aker shipyard said in a statement before the matter was resolved that OSG was attempting to disrupt work at the shipyard, prevent competition, and "further protect their already dominate position in the tanker market."

"Since the shipyard announced that it would construct the two additional tankers," said Aker senior vice president Scott Clapham, "we have received inquiries for their purchase from more than five parties, one of which was OSG themselves."

OSG owns and operates 110 vessels worldwide and 23 under the U.S. flag. The company has bought or leased 11 Aker tankers out of 16 ships built in the last decade at the South Philadelphia yard. In May, OSG will take possession of a 12th ship.

"We've had a half-dozen lawyers review every aspect of this," said Manual "Manny" Stamatakis, chair of the private nonprofit Philadelphia Shipyard Development Corp., which acts as a middleman between the state and the shipyard. "If this wasn't possible, we wouldn't do it."

In late 1997, then-Mayor Ed Rendell and then-Gov. Tom Ridge signed on to spend $429 million in taxpayer money - a combination of state, city, and federal grants - to rebuild the old Philadelphia Naval Shipyard into a commercial shipbuilding facility.

OSG is the largest operator of tankers that transport crude oil, petroleum, and gas under the U.S. Jones Act, a 90-year-old law requiring that U.S.-built ships transport cargo among U.S. ports.

The company has declined to comment beyond its 16-page letter. Among OSG's contentions:

Spending capital budget funds to subsidize operating costs and shipyard activities does not constitute "public improvements" and actually violates state law.

Using taxpayer money to cover Aker's operating costs "contradicts" what Pennsylvania told buyers of its general-obligation bonds - that the funds would be used to pay for construction and major rehabilitation of public buildings for the Commonwealth and its institutions.

The state bailout relies on "inflated appraised values of assets to be transferred to the Shipyard Development Corp. by Aker Shipyard."

"OSG wants to control the market," Stamatakis has said. "They have the largest majority of the newest double-hull tankers in the Jones Act fleet. They don't want anybody else to get a brand-new ship, because it's competition."

Susan Howland, president of Howland Group Inc., a U.S. maritime consultant in Trevose, said before Tuesday's development that "OSG will do whatever is possible to prevent these last two ships from being built, because it upsets their business model to dominate the market and it adds capacity that OSG will not control and will cause pressure on what they do control.

"Transportation - ships, trains, trucks, planes, warehouses - is all about capacity. Managing capacity is how you make money," she said. "As long as OSG does not have control over this new capacity, they are going to do everything they can to make sure nobody else does. It's like being the old lover - they may not want you anymore, but they damn sure don't want anyone else to have you."